Efforts to reorient Mexico towards a market economy continued as President Carlos
Salinas pushed privatization of state enterprises and sought free trade agreements with
other nations. More striking, however, were his efforts to turn Mexico away from
one-party, authoritarian rule and towards a truly competitive, democratic political
system. Both the economic and political changes provoked serious debate and the emerging
new political order was marked by violence in some states. Although relations between
Mexico and the United States continued warm, U.S. involvement in a kidnapping brought
strong protests from all sectors of Mexican society.

Economic policy. President Salinas sought to stimulate economic growth by forcing
Mexican producers to compete in both national and international markets. Salinas argued
that Mexico could not longer afford inefficient state enterprises but needed funds to
repair the economic infrastructure and meet the needs of the social sectors. In May, the
Mexican congress amended the Constitution to allow reprivatization of the banking system,
which had been nationalized in 1982. To pacify nationalists and prevent takeovers by
international banks, foreign stock ownership was limited to 30% of equity. Reprivatization
of the eighteen largest banks will produce between three and five billion dollars in
government income. Salinas also put Telmex, the national telephone company, on the auction
block by selling off the government's 56% interest. Foreigners can buy a majority share of
stock, but daily operations will be controlled by Mexicans owning 20% of the equity.
Although a profitable $8 billion company, Telmex needs massive new capital investment to
make it efficient. To encourage domestic capital investment and the repatriation of some
of the $50 billion in flight capital, the government reduced the top marginal tax rate to
35%, making it competitive with the United States.

Resisting these moves were redundant bureaucrats, protected industrialists, and those
nationalists who feared foreign economic domination. Economy. Economic indicators gave
mixed signals about the direction the economy was taking. The gross national project was
expected to grow about 3%, the first time since 1982 that it outstripped the population
growth rate. The inflation rate was projected to be 25%, down significantly from past
years when it reached triple-digit levels. Retail sales in the first five months dropped
22.8% compared to the previous year. Non-oil exports, which account for 65% of Mexico's
export income, rose only 4% in first half of the year. The current account deficit,
originally projected at $5 billion, grew at four times the projected rate until mid-August
as imports outstripped exports. The Persian Gulf crisis sent oil prices skyrocketing,
producing billions of dollars in unanticipated income for the government.

Workers demanded substantial wage increases in spite of national wage-price agreements,
but the government extended the price freeze on basic commodities until January 31, 1991
in an effort to offset the effects of inflation.

In February, Mexico and 15 foreign banks used the Brady Plan to reduce Mexico's foreign
debt from $95 billion to $80 billion, thus saving $1.6 billion a year in interest payments
between 1990-1994. Analysts that the debt will have to be renegotiated in the last year
and that Salinas is simply that the economy will grow sufficiently to sustain a high debt
level.

The Persian Gulf crisis provided the government with a much-needed income boost but
also created problems. Mexico is the world's fifth largest oil producer. The sudden
increases in oil prices brought billions in unanticipated income but the uncertainty of
long-term prices and their possible effect on the United States made Mexican officials
cautious. Mexican dependency upon the United States as both its principle export market
and source of investment capital means that an American economic recession would damage
the Mexican economy. Mexico agreed to increase its production by 100,000 barrel a day but
could not expand production to make a significant dent in the amount of oil taken off the
world market by the blockade of Iraq. Because of economic exigencies and low oil prices
since the early 1980s, Mexico has not had the necessary income to invest in its oil
industry. The government adopted a $50 billion 5-year energy expansion plan, financing the
project with both public and private funds.

President Salinas ardently sought free trade agreements with the United States, Canada,
and some Latin American nations, a policy reversal for Mexico, which in past years had
rebuffed suggestions that a North American free trade zone be created. This new policy
emerged in reaction to the probability of increased economic competition because of the
rapid liberalization of Eastern European economies, German reunification, and a general
Latin American trend towards free trade. In September, President George Bush asked
Congressional approval to speed free trade negotiations. Salinas wants agreement by 1993.

Canada, which had previously signed a free trade agreement with the United States on
the assumption that Mexico would not be a party, moved quickly to establish a strong
bilateral agreement to insure independent Canadian access to the Mexican economy.

In spite of the problems seen by some, a North American free trade zone would more
effectively compete with the European Economic Community, Eastern Europe, and the Asian
economic dynamos because it would combine cheap Mexican labor, U.S. high technology, and
Canadian natural resources. Both U.S. and Canadian labor unions feared that jobs would be
lost to Mexico. If, as most, expect, these negotiations finally create a North American
common market, it would be formidable, for Canada is the U.S.'s largest trading partner
and Mexico is the third largest.

President Salinas also sought additional markets for Mexican exports and additional
sources of capital investment in other parts of the world. His trip early in the year to
Portugal, the United Kingdom, Belgium, Germany, and Switzerland to lobby with European
Economic Community officials for increased trade and investment achieved little, for the
EEC was more concerned about the Eastern Europe. He then went to Australia, Singapore, and
Japan in June to seek expanded trade. In October, he went to Honduras, Bolivia, Uruguay,
Brazil, and Venezuela to start negotiations for bilateral free trade agreements. Many
Latin American nations are in the process of reducing barriers to international trade, and
Salinas was trying to prevent the exclusion of Mexico.

Politics. Encouraged by President Salinas' very narrow and disputed victory in 1988,
the government party's slim majority in Congress, and the government's willingness to
recognize some opposition victories, opposition parties contested governmental actions
both in local elections and in Congress.

In the early months of 1990, leftist political party activists used direct action and
violence in unsuccessful efforts to reverse official election returns which they believed
fraudulent. Confrontations between Democratic Revolutionary Party (PRD) partisans and
security forces in Guerrero resulted in ten deaths. In Michoacán, home of PRD leader and
former presidential candidate Cuauhtémoc Cárdenas, PRD activists occupied seventeen city
halls from December, 1989 until dislodged by the army in April, 1990. In Puebla, ten died
in a dispute between PRI and the Workers' Revolutionary Party supporters over the outcome
of a mayoralty contest.

In April, the opposition parties PRD, PAN, Authentic Party of the Mexican Revolution,
and the Independent Group boycotted Congress to protest the refusal of the government
party, the Institutional Revolutionary Party (PRI), to investigate the bankruptcy of the
national fisheries bank. PAN broke with the other political parties to cooperate with PRI
to pass legislation to reprivatize the banks.

Ernesto Ruffo (PAN), governor of North Baja California state, revealed that his PRI
predecessor had illegally used state funds to support the candidacy of the PRI
gubernatorial candidate. Opposition politicians had long asserted that the government and
PRI regularly practiced such illegalities but had been unable to gain access to the
necessary public records to prove the charges until Ruffo became the first opposition
governor in Mexico in this century.

Rising opposition to the government encouraged President Salinas to accelerate the
democratization of the political system by beginning to restructure the government
political party, PRI. Public support for PRI has declined steadily in recent decades but
dropped precipitously when the economy plunged into recession in 1982 and the government
adopted austerity policies which hurt the average person. Although PRI claims to be the
world's largest political party with 20 million members, Salinas only obtained nine
million votes in 1988. Throughout its history, PRI has been controlled by national
political bosses in Mexico City; the bosses chose the candidates for all levels of
government and the PRI machinery, backed by the government, insured that those candidates
took office.

In preparation for PRI's national meeting in September, party leaders were ordered to
allow 70% of the delegates to be elected in municipal assemblies instead of being
appointed by state governors as in the past. For the first time, former national
presidents were not invited to attend. When party conservatives showed signs of resisting
these democratic changes, Salinas floated the trial balloon that he might create a new
party called Solidarity. At the national meeting, PRI adopted a number of new rules which
might make the party more democratic. Henceforth, in most states, the party will use
primary elections to select gubernatorial and senatorial candidates. These candidates can
get on the primary ballot either by endorsement by 30% of the local organizations or by a
petition signed by 20% of registered party members in those states. Delegates to the
party's national council will be elected by direct, secret ballot, replacing the system by
which they were appointed from Mexico City, and the party's presidential candidate will be
selected by majority vote of the council members. In the past, one automatically belonged
to PRI if one was a member of an organization (such as a labor union or a farmers'
organization) which was in one of the party's sectors. To reduce the power of the often
corrupt bosses of these organizations, the new rules allow individuals to join the party.

Foreign policy. Mexico grew in importance as a battleground in the American crusade
against illicit drugs. Narcotics experts estimate that the bulk of the cocaine entering
the U.S. crosses the Mexican border. Although Mexico has cooperated with US efforts to
deal with the American drug problem, Washington officials believe that Mexico should do
more. Mexico, sensitive to violations of its sovereignty by its more powerful northern
neighbor, refused to give more power to American officials inside Mexico. In early April,
the U.S. government-aided kidnapping of Dr. Humberto Alvarez from Guadalajara to
California outraged Mexico. Alvarez was alleged to have aided drug traffickers in their
torture and eventual murder of DEA agent Enrique Camarena. U.S. authorities paid a Mexican
criminal to arrange the abduction but denied that any DEA agents in Mexico participated.
Angered, Mexico protested and demanded that it be allowed to station Mexican policemen
inside the United States on the same terms that the latter stations policemen in Mexico.
Mexican views were vindicated in August when a federal judge in California freed Alvarez
and allowed him to return to Mexico because of the criminal means by which he was abducted
and brought to the United States with U.S. governmental aid even though criminal charges
against him continued.

In May, Pope John Paul II made his second visit to Mexico as a head of state. He
condemned abortion, divorce, and materialism. The papal visit, the second in 11 years,
temporarily reopened issues of Church-State relations in this officially anticlerical
nation. The Constitution prohibits church ownership of schools, the use of religious
symbols in politics, voting by ecclesiastics, and the wearing of clerical garb in public,
measures condemned by the Papacy. The papal visit renewed demands by some churchmen and
politicians for the lifting of these restrictions but the Pope carefully avoided speaking
to these issues and the government reaffirmed its commitment to the separation of Church
and State. Moreover, in spite of speculation that this papal visit was a prelude to Mexico
establishing diplomatic relations with the Vatican State, President Salinas only agreed to
send a personal representative.

On August 14, Mexico, in accordance with United Nations decisions, imposed sanctions on
and suspended all trade with Iraq. By the end of the month, Mexico agreed to send troops
to the Persian Gulf in support of UN actions. This decision created a stir in Mexico,
which has not sent troops abroad since World War II. This reversal of foreign policy is
seen as a Mexican attempt to curry favor with the major industrial nations.